Tuesday, 5 February 2013

If pigs - could fly

The most troubled Euro economies have be given an acronym PIIGS, used by international bond market, and the economic press to refer to the broken economies of Portugal, Ireland, Italy, Greece and Spain. The bad news in that there is now a new member of this wayward group and it's new member is France.  So the new acronym will now have to be - IF PIGS!

Whilst the recent degree of calm surrounding the EURO might be good news for the world economy it doesn't help France.  As rates in the sovereign bond market have eased the Euro has strengthened against the Dollar and the Pound, this leaves the French economy in a more parlous productivity position, with its goods priced out of foreign markets.  Also France has rapidly become less competitive  relative to other economies in the Eurozone as high unemployment elsewhere has squeezed down wages in the peripheral economies, whilst France's labour laws keep costs high at home.

This is the major reason why Francois Hollande is calling for an exchange-rate policy (coded language for devaluation) , the last thing on the Angela Merkel's mind.   Germany has always wanted a strong currency to drive productivity, particularly since it has a captive export market in the less productive Eurozone.

Why is this important?  

We Brits always enjoy it when the French are in a tight spot, but this situation could be even more enjoyable than normal, particularly for Dave (Cameron).  As Dave musters support for his renegotiation his natural ally would be Germany, they will need Britain to counterbalance the more socialist tendencies of Hollande.  These tendencies look set to become more so and less aligned to Germany and this could be our big opportunity to divide and rule.  Some time ago I  derided  Boris Johnson for promoting the idea of an 'Outer Tier' of EU members not in the Eurozone - but as this French economic disaster unravels he might actually be right!

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